New Year's Financial Resolutions

It’s that time of year again, when we focus on our New Year’s Resolutions. Mine are the same every year: No Christmas pudding fuelled promises fixing my supposed shortcomings for me. No, No, No, I’ll let you in on my resolution, that will help me get to retirement.

1) Spend less and save more

Unless you want to work for ever, and I don’t, not at this rate anyway, you need to accumulate assets that allow you to retire at the time and in the lifestyle of your choosing.

To do this I have resolved to have a positive cash flow every year.

To do this I track my expenses and have a budget that will allocate 15% of income to savings.

The days where you can expect the housing and the stock market to do the heavy lifting for you are gone. While the retailers are not enjoying it, deferred gratification is my new best friend. My retirement lifestyle will be determined primarily by how much I save and invest during my accumulation years.

2) Manage your debt

If you are spending more than a 3rd of your income servicing debt, you probably have a serious problem. Paying off non-deductible debt is the equivalent of buying a risk free, tax free bond that yields the interest rate of the debt.

3) Fund your superannuation fund

The easiest way for me to save for retirement is superannuation and salary sacrifice. The earlier you start the better, because you’ll be maximising the benefits of compounding growth.

4) Ignore all market predictions for 2014

The one thing about predictions is that they’re difficult to get right. Baseballer, Yogi Berra said it best, “Making predictions is difficult, especially about the future.”

The only thing that moves markets away from current prices is unexpected news. Nobody can see unexpected events any better than you can. Most of the blathering done on the six o’clock news is sophisticated advertising to get you remember a firm or make a trade.

5) Don’t follow the market on a daily basis

Short term market movements are irrelevant to the long term investor. Stock market volatility in recent years has frightened investors, causing them to shun stocks. This decision has robbed investors as the Australian share market has increased in value by about 13%, while the global share market grew by around 11% in 2012 and 20% in 2013.

The news outlets trade on bad news, apparently we love hearing about the next piece of bad news, indeed I feel sometimes that the six o’clock news should simply be replaced by a rendition of Monty Python – I’m so worried. I resolved a few years back to only look at the markets once a week, usually Friday as it saved me four needless emotional reactions each week.

6) Diversify your portfolio

At a minimum, place an egg in each of these baskets:

Australian top fifty large stocks
International large stocks
Bank deposits
Income producing real estate

7) Have a financial plan

Knowing which asset classes constitute a diversified portfolio is only the beginning. I’m often asked for my best share market prediction but unfortunately my daughter is using my crystal ball to predict exam questions, so I stick to my written financial plan as the first step in achieving my retirement goals.

Your plan should be focused on your goals, time horizon and risk tolerance and contain an investment strategy that determines your portfolio allocation.

The strategy should be based on your unique needs, not on anyone’s predictions for 2014 and beyond. Think of your portfolio as a ship and your financial plan as its rudder. A portfolio absent a financial plan is a rudderless, a rusty tub in stormy seas. Planning free portfolios have caused investors much grief and left many of them wondering if they’ll ever be able to retire.

If you can relate to what I’ve just described, resolve to make 2014 the year you give financial planning the priority it deserves.

8) Determine the proper risk level for your portfolio

Your portfolio must be designed with your risk tolerance in mind. While everyone wants 100% returns, per annum, with no tax and no risk the reality is a little different.

Investment risk is the driver of investment return, but if your portfolio does not offer you returns commensurate with your risk or it contains more risk than you can stand it’s a financial time bomb. Because next time market turbulence occurs you’ll sell in panic just like so many investors did in 2008 and 2009.

In depth risk analysis is an important part of a good financial plan.

9) Don’t procrastinate

Start now, not in March, June or …….. The financial planning process is not difficult, but it is complicated and you’ll have to devote the time to do it properly. If you don’t have the interest or knowledge to do it yourself, I am ready, willing and able to help you.